Random House, Penguin Agree to Merge

Oct 29, 2012

In a deal that had been months in the making, Pearson and Bertelsmann announced Monday morning that they have signed an agreement to form a joint venture that will combine the businesses of Random House and Penguin. The deal, which is expected to close in the second half of 2013, will make Penguin Group chairman John Makinson chairman of the newly named Penguin Random House company, while Random House chairman and CEO Markus Dohle will be CEO.

Under the terms of the agreement, Bertelsmann will own 53% of the joint venture and Pearson will own 47%. The joint venture will exclude Bertelsmann’s trade publishing business in Germany, and Pearson will retain rights to use the Penguin brand in education markets worldwide. Bertelsmann will nominate five directors to the board of Penguin Random House, and Pearson will nominate four.

The announcement came after word leaked Sunday that News Corp. was considering making an offer for Penguin, but Makinson said the Pearson board is committed to the Bertelsmann deal. And Pearson and Bertelsmann executives made it sound like they were proceeding as they expect the merger to move forward. “This combination with Random House – a company with an almost perfect match of Penguin’s culture, standards and commitment to publishing excellence – will greatly enhance its fortunes and its opportunities. Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers,” said Pearson CEO Marjorie Scardino. Thomas Rabe, chairman and CEO of Bertelsmann, said: “With this planned combination, Bertelsmann and Pearson create the best course for new growth for our world-renowned trade-book publishers, to enable them to publish even more effectively across traditional and emerging formats and distribution channels. It will build on our publishing tradition, offering an extraordinary diversity of publishing opportunities for authors, agents, booksellers, and readers, together with unequalled support and resources.”

Although the two parties have signed the deal, final approval will need the approval of government regulators. Under the terms of the agreement, neither Pearson nor Bertelsmann can sell any part of their stake in Penguin Random House for three years. To protect Pearson’s interests as a minority shareholder, if Bertelsmann declines a Pearson offer to sell its entire shareholding, Pearson may require a recapitalization by which Penguin Random House raises debt of up to 3.5x EBITDA, with a dividend distributed to shareholders in line with their ownership. In addition, from five years after completion, either partner may require an IPO of Penguin Random House. The combination of the two companies will produce a publishing house with worldwide revenue of about $4 billion.

Makinson told PW the joint venture could change how Penguin proceeds in pressing ahead with its fight against the Department of Justice's e-book price fixing case. Repeating that Penguin did nothing wrong when it moved to agency, he said for the moment Penguin is still preparing for a June trial. He allowed, however, that after talks with the DoJ about the merger and further discussions with Random its approach to the lawsuit could change.

In his letter to Random employees, Dohle wrote that “as the CEO of the combined business, my commitment to you and our new colleagues is to retain the distinct identities of both companies' imprints, where authors remain the center of everything we do. Authors and their agents will continue to enjoy an enormous choice of publishing homes, where creative autonomy and great resources will be a defining hallmark.” Penguin Random House will help Random “realize our vision to provide our content for everyone, everywhere, in every format, and on every platform,” Dohle added, while “on a global scale, we will be able to offer a deeper, even more robust backlist, along with our highly successful frontlist,” Dohle wrote.

In his letter to Penguin employees, Makinson also emphasized the maintaining diverse editorial choice. "I have no doubt that some authors, agents and customers will express concern to many of us that this merger will reduce choice and competition. I believe, and so I know does Markus, that exactly the opposite will happen," Makinson wrote. "The publishing imprints of the two companies will remain as they are today, competing for the very best authors and the very best books. But our access to investment resources will also allow Penguin Random House to take risks with new authors, to defend our creative and editorial independence, to publish the broadest range of books on the planet, and to do it all with the attention to quality that has always characterized both Penguin and Random House."

Until the regulators sign off on the deal, Random and Penguin will continue to operate in what they hope will be a business as usual fashion. Makinson said he and Dohle will be able to do some preliminary planning, but no real integration will begin to the deal is finished. And Makinson acknowledged combining the two will take time."We will need to forge a personality for this company, drawing on the strengths of our two parents and on the legacies of our two publishing companies, but shaping a working culture that is forward looking and imaginative, global in scope and yet local in focus, friendly and informal," he wrote. "It will take us a while to get there. New companies take time to mature, however glorious and distinguished their antecedents. But I have no doubt that we have everything that we need - the authors, the imprints, the brands, the scale and the people – to make this a company of which we can all be proud."

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